big bank tax drain

8/7/2019 Big Bank Tax Drain

1/25

Big Bank

Tax Drain

How Wall Street Speculation and Tax

Avoidance are Starving Public RevenuesA Public Accountability Initiative report, prepared for National Peoples Action

by Matthew Skomarovsky and Kevin Connor

March 2011


2/25

National People's Action (NPA) is a network of community power organizations from

across the country that work to advance a national economic and racial justice agenda.

NPA has over 200 organizers working to unite everyday people in cities, towns, and rural

communities throughout the United States. For 38 years NPA has been a leader in thefight to hold banks accountable to the communities in which they serve and profit.

Public Accountability Initiative(PAI) is a non-profit, non-partisan watchdog

organization focused on corporate and government accountability. PAIs mission is to

facilitate and produce investigative research that supports citizen-led accountability efforts.

PAI's hardhitting research reports on topics such as wasteful government subsidies,

corporate lobbying efforts, conflicts of interest, and Wall Street fraud have been cited by

the New York Times, the Wall Street Journal, and numerous other media outlets.


3/25

2

Table of Contents

Executive Summary .4

Big Bank Speculation & Budget Shortfalls .... 6

Big Bank Income Tax Avoidance .. 9

Assisting Tax Dodgers ..17

Other Wall Street Tax Breaks and Revenue Sources ...18

Appendix ..20


4/25

3

Executive Summary

Wall Street banks caused the economic crisis that has left millions unemployed, foreclosed-

on, and without prospects in the worst economy since the Great Depression. This crisis

has, in turn, caused massive tax revenue shortfalls for the federal government and for state

governments across the country: nearly $300 billion combined for 50 states in the years

since the crisis began. To deal with these budget woes, politicians are cutting public

spending: laying off teachers, attacking public sector workers, raiding pensions, closing

hospitals, and eliminating essential services for children, veterans, and the elderly.

Raising revenue from the wealthy, bailed-out banks that caused the crisis would be a far

more sensible way to address these budget woes. This report analyzes data from the latest

financial filings by the six big banks Bank of America, Wells Fargo, JPMorgan Chase,

Citigroup, Goldman Sachs, and Morgan Stanley to expose the ways in which they

continue to avoid taxes and contribute to tax revenue shortfalls, rather than pay for an

economic recovery that will put people to work, keep people in their homes, and preserve

the safety net for people, not corporations.

Key findings:

This year Bank of America is receiving the income tax refund from hell $666 million for 2010, according to its annual report filed in late February 2011.

This is following a $3.5 billion refund reported in 2009. Bank of Americas federal

income tax benefit this year is roughly two times the Obama administrations

proposed cuts to the Community Development Block Grant program ($299

million).

Six banks Bank of America, Wells Fargo, Citigroup, JPMorgan Chase, GoldmanSachs, and Morgan Stanley together paid income tax at an approximate rate of

11% of their pre-tax US earnings in 2009 and 2010. Had they paid at 35%, what

they are legally mandated to pay, the federal government would have received

an additional $13 billion in tax revenue. This would cover more than two years

of salaries for the 132,000 teacher jobs lost since the economic crisis began in

2008.

Wells Fargo reportedly received a $4 billion federal income tax refund on$18 billion in pre-tax income in 2009, and paid 7.5% of its pre-tax income of

$19 billion in 2010 in federal taxes. Its net federal income tax benefit for 2009

and 2010 combined, $2.5 billion, is equal to the Obama administrations proposed

cuts of 50% to the Low-Income Home Energy Assistance Program.

Banks use a variety of mechanisms to avoid corporate income taxes, includingoffshore tax shelters. 50% of the six banks 1871 foreign subsidiaries are

incorporated in jurisdictions that have been identified as offshore tax

havens, such as the Cayman Islands.


5/25

4

Bank of America operates 371 tax-sheltered subsidiaries, more than anyother big bank studied, and 204 subsidiaries in the Cayman Islands alone,

according to its latest regulatory filings. 75% of Goldman Sachss foreign

subsidiaries are incorporated in offshore tax havens.

The banks private banking arms also protect the wealth of rich clients fromtaxation through offshore investment strategies. Bank of Americas wealth

management arm encourages clients to register their yachts in foreign

jurisdictions for tax reasons.

Closing special tax loopholes on the financial sector and implementing sensiblerevenue-raising initiatives such as the Financial Speculation Tax could generate

over $150 billion in federal tax revenue each year.


6/25

5

I. Big Bank Speculation & Budget Shortfalls

The federal government and state governments across the country are facing significant

budget shortfalls due to lost tax revenue and increased relief spending during the recession.

The breadth and depth of the recession owes to a decade of reckless speculation,

fraudulent lending, lax regulation, and low interest rates pursued by the largest banks and

compliant politicians, culminating in an unprecedented housing bubble.

The bubble economy rewarded Wall Street with record profits and executive bonuses, but

its collapse wiped out $9 trillion in property value nationwide, destroyed the construction

industry, bankrupted millions of homeowners, and plunged the entire US economy into its

sharpest downturn since the Great Depression.1

The direct impact of this collapse on local and state tax revenues and relief spending has

been disastrous and accounts for most of the states' current funding troubles.

! Collectively, states lost approximately $297 billion in tax revenues from late2008 to 2010 due to the housing bubble collapse.2 Unlike cities and the federal

government, states cannot borrow money to finance operating costs and must

choose between tax increases, spending cuts, or a combination of the two to plug

budget holes.

! As a result of lost tax revenues and projected losses, states face a combinedbudget deficit of $125 billion for fiscal year 2012, and have already dealt with

deficits of $423 billion for 2009, 2010, and 2011 combined.3

States across the country are responding to these deficits with pay and benefit cuts for

public employees and cuts to public programs like education, pensions, and veteransbenefits. These cuts will hurt the same people who have been hurt most by the recession,

and will impede economic recovery and job creation.

1 The $9 trillion figure is drawn from Zillows December 2010 report on the US housing market:

http://www.zillow.com/blog/research/2010/12/09/u-s-homes-set-to-lose-1-7-trillion-in-value-

during-2010/2 State tax revenue data is drawn from US Census tax collection figures. Tax revenue losses

from the recession are estimated by comparing actual state tax revenue since 2007 Q3 with

a hypothetical 5% annual revenue growth, the average over the preceding 10 years. State

tax collection numbers are available through 2010 Q3.3 Center on Budget and Policy Priorities, States Continue to Feel Recessions Impact,

http://www.cbpp.org/cms/?fa=view&id=711


7/25

6

Table 1: Selected State Tax Revenue Losses and Deficits Since Start of

Recession

State

Estimated Tax

Revenue Loss,

2009-2010

2009-2011

Deficits 2012 Deficit

All States $297 billion $423 billion $125 billion

California $43.7 $100.5 $25.4New York $24.6 $36.9 $9.0

Texas $21.1 $8.1 $13.4

New Jersey $14.5 $27.8 $10.5

Florida $11.3 $16.4 $3.6

Illinois $11.1 $32.1 $15.0

Ohio $11.0 $9.2 $3.0

Pennsylvania $7.8 $13.2 $4.5

Georgia $7.8 $11.1 $1.7

Michigan $7.3 $7.3 $1.8Note: Deficits are drawn from Center on Budget and Policy Priorities Data, and tax revenue losses are

estimated based on US Census data.

! California has faced unprecedented budget deficits after losingapproximately $43 billion in tax revenue to the recession during 2008-2010.

The state has already closed most of a $100.5 billion shortfall during the 2009,

2010, and 2011 fiscal years with massive cuts to education and other public

services, and faces another projected $44.6 billion shortfall through 2013.

! An epidemic of foreclosures by the biggest banks have cost localgovernments in California an estimated $2-14 billion. A recent analysisshowed that interest rate swaps sold to California by Goldman Sachs, JP Morgan

Chase, and Bank of America have cost the state $1.5 billion dollars since 2008.4

! The recession has cost New York State around $24 billion in tax revenue,and has left the state with deficits of $28.4 billion since the recession began.

Budget cuts pushed by Governor Andrew Cuomo, backed by many Wall Street

executives whose bonuses owe to trillion-dollar bailouts, have already resulted in

layoffs of thousands of state workers and cuts to education and services for the

poor. Meanwhile, the state has refunded tens of billions in Wall Street stock

transfer taxes per year, $210 billion since 1981.5

! If Wisconsins tax collections hadnt declined steeply from the recession,the state would be roughly $3.5 billion richer, enough to close its projected

deficit for the year. The states shortfalls have led to a political crisis as Governor

4 Wake up Wall Street, SEIU, August 2010.

http://www.seiu721.org/Wake%20Up%20Wall%20Street%202010-08%20Report.pdf5 Data from the 2009-2010 New York State Tax Collections Report


8/25

7

Scott Walker has tried to abolish the collective bargaining rights of state

employees, who have already agreed to pay cuts and pension contribution

increases. 6

Governor Walker is one of many politicians and talking heads who have lined up to blame

public employees and unions for the budget shortfalls. Some are now pointing to

underfunded state pensions as an excuse to cut pension benefits and possibly even defaulton pension obligations.7 But studies show that most of the pension shortfall is due to the

financial meltdown and resulting stock market collapse from 2007-2009:

! Collectively, local and state employee pensions lost an estimated $857billion from steep falls in asset values during the financial crisis,8according

to an analysis by the Center for Economic and Policy Research, averaging over

$16 billion per state and over $57,000 per full-time state and local employee.9

Bank foreclosures also take a heavy toll on local government budgets, with one study

estimating the cost as ranging from $5,000 to $35,000 per foreclosure.10 At this rate, the

cost of 1.05 million foreclosures in 2010 to local governments was between $5.25 billionand $36.8 billion.11

6 http://www.jsonline.com/news/statepolitics/116470423.html7 http://www.nytimes.com/2011/01/21/business/economy/21bankruptcy.html8The Origins and Severity of the Public Pension Crisis, CEPR, February 2010.

http://www.cepr.net/documents/publications/pensions-2011-02.pdf9The US Census reported 14.9 million state and local government employees in 2009.

http://www2.census.gov/govs/apes/09stlus.txt10 See estimates cited in Wake Up Wall Street, drawn from William C. Agpar, Mark Duda, and

Rochelle Nawrocki Gorey, The Municipal Cost of Foreclosures: A Chicago Case Study

http://www.995hope.org/content/pdf/Apgar_Duda_Study_Full_Version.pdf11http://www.huffingtonpost.com/2011/01/13/foreclosure-record-2010_n_808398.html


9/25

8

II. Big Bank Income Tax Avoidance

Corporate income tax avoidance by big banks is a significant and growing drain on the

public purse. Corporate tax avoidance ultimately works to shift the tax burden from big

businesses and wealthy elites onto everyone else and exacerbates the revenue shortfalls

plaguing the federal budget and state budgets across the country.

A survey of federal, state, and foreign taxes paid over the past decade, as reported in

financial statements, indicates six Too Big To Fail banks Bank of America, Wells Fargo,

Citigroup, JP Morgan Chase, Goldman Sachs, and Morgan Stanley have paid tens of

billions less in corporate income taxes than the federal statutory rate of 35%.12 Excluding

Citigroups three years of deep losses, these six bailed-out banks pay roughly the same

federal tax rate on their US profits as kindergarten teachers pay on their salaries, not even

counting the banks sizable earnings hidden from taxation in hundreds of offshore

subsidiaries.

Since federal corporate income tax returns are confidential, estimating tax payments is an

inexact science. Please see A Note on Methodology in the Appendix for more

information on how we calculated these estimates.

The Bailout Years

During the two years following the bailouts of 2008, the big banks have essentially enjoyed

a tax holiday:

! In 2009 and 2010, the six banks appear to have paid a net of only $6.1 billion infederal income taxes out of $54.8 billion of reported US earnings, or 11.2%.13Ifthey had paid 35% during these years the federal government would have

received an additional $13 billion in tax revenue. This is enough to cover more

than two years of salaries for the 132,000 teacher jobs lost since the economic

crisis began in 2008.14

! In 2010, the six banks paid only 15% of their US income in federal taxes,$8.3 billion less than a 35% rate. Bank of America and Citigroup report having

12 Public companies report annual income taxes paid and domestic and foreign pre-tax income in

their annual shareholder reports and 10-K filings with the SEC, allowing a tabulation of taxes paidas a proportion of pre-tax domestic and foreign income. These numbers do not necessarily provide

the effective tax rate for a company, but should provide a decent approximation. See A Note on

Methodology in the appendix for further details.13 Based on a review of current payable federal income tax and earnings disclosures in the annual

reports of each bank for 2009 and 2010, available at SEC EDGAR.14 Bureau of Labor Statistics data on Current Employee Statistics show that there were 132,000

fewer employees in local government education in December 2010 than there were in December

2008 7.95 million as opposed to 8.08 million.


10/25

9

received net tax refunds of $666 million and $249 million respectively from the

federal government. Bank of Americas refund is roughly twice the amount of cuts

to the Community Development Block Grant Program in Obamas proposed

budget (roughly $300 million).15 Other bailed-out financial firms like AIG, State

Street, Prudential and SunTrust report having paid no taxes or having received net

tax refunds in 2010.

Table 2: Big Bank Earnings and Federal Taxes, 2009-2010

Company

Pre-tax

Earnings

Pre-tax US

Earnings

Current

Federal

Taxes

Tax as % of

US

Earnings

Bank of America $3.0 -$12.2 -$4.2 --

Citigroup $5.4 -$13.0 -$1.9 --

Goldman Sachs $32.7 $19.4 $5.8 30.1%

JPMorgan Chase $40.9 $21.5 $8.7 40.3%

Morgan Stanley $7.2 $2.1 $0.37 17.8%

Wells Fargo $37.0 $37.0 -$2.5 -6.8%

TOTAL $126 billion $54.8 billion $6.2 billion 11.2%

Source: SEC filings for each bank.

! In 2009, the six banks appear to have collectively paid no taxes to thefederal government; three banks appear to have received net tax refunds totaling

$9.2 billion Wells Fargo ($3.95 billion), Citigroup ($1.7 billion) and Bank of

America ($3.6 billion). Wells Fargo net income tax benefit for the two years is

roughly equal to the Obama administrations proposed 50% cut to the Low-

income Home Energy Assistance Program, or LIHEAP ($2.5 billion).16

! After taking billions in bailout funds from the US government in 2008, financialstatements for Citigroup and Goldman Sachs suggest that the banks did not

pay a penny of federal taxes for 2008, and instead report having received net tax

refunds of $4.6 billion and $278 million respectively from the federal government.

! In its 2010 annual report, Bank of America reported a total combined(federal, state, foreign) cash income tax refund of $6.3 billion.17 This offers

further evidence of the banks significant federal income tax refund for 2009.

How did these banks avoid taxes? Press reports explain Bank of Americas tax benefit in

2009 as a result of its losses for that year, and Wells Fargos as a function of the losses of

15 http://nationaljournal.com/whitehouse/exclusive-obama-to-cut-energy-assistance-for-the-poor-

2011020916 Ibid.17 Bank of America SEC 10-k, Consolidated Statement of Cash Flows, page 141.

http://www.sec.gov/Archives/edgar/data/70858/000095012311018743/g25571e10vk.htm


11/25

10

Wachovia, which it acquired on the verge of collapse in 2008.18 A corporate tax accounting

oddity allows corporations to carry back tax losses to prior years in which they

overpaid their income taxes, so corporations often receive tax refund checks literally

from the US Treasury.19 But the banks also use a wide range of accounting gimmicks and

tax credits in order to avoid income taxes or defer them, often indefinitely, to future years.

A Decade of Corporate Income Tax Avoidance

The tax holiday big banks enjoyed following the financial crisis appears to have been part

of a much longer trend. A review of financial statements from 2001-2010 suggests the

banks have been engaging in tax avoidance for most of the decade:

! Bank of America, Wells Fargo, Citigroup, JP Morgan Chase, Goldman Sachs, andMorgan Stanley reported roughly $382 billion in domestic earnings over the past

ten years, including some heavy recent losses from the financial crisis. During

this period, these banks paid $116 billion in federal taxes and $20 billion in

state taxes, about 30.3% and 5.2% of their US income, respectively.24

! Combined US income for the six banks from 2001-2010 was significantly reducedby Citigroups unprecedented $84 billion in losses from the financial meltdown

between 2007-2009. If Citigroups three years of losses are excluded, the six

banks domestic earnings totaled about $466 billion and their federal and

state taxes were $124 billion and $20.3 billion respectively -- rates of 26.7%

and 4.3%.

Table 3: Big Bank Earnings and Federal Taxes, 2001-2010

Company

Pre-tax

Earnings

Pre-tax US

Earnings

Current Fed.

Taxes

Fed. Taxes as

% of US

Earnings

Bank of America $144.7 $118.1 $36.2 30.7%

Wells Fargo $110.9 $110.9 $17.3 15.6%

Citigroup* $160.1 $87.5 $22.5 25.7%

JP Morgan Chase $119.5 $73.2 $23.5 32.1%

Goldman Sachs $93.6 $55.9 $16.1 28.8%

Morgan Stanley $50.7 $20.6 $8.6 41.9%

TOTAL $679 billion $466 billion $124 billion 26.7%

* This figure excludes three years (2007-2009) of deep losses and associated taxes at Citigroup.

! The statutory federal corporate income tax rate is 35%. If these six banks had paid35% of their US earnings in federal taxes, it would have generated an

18 http://www.charlotteobserver.com/2010/03/26/1337021/billions-in-tax-benefits-for-

banks.html19 For a discussion of this, see Citizens for Tax Justices 2004 report on Corporate Income Taxes

in the Bush Years, available at http://www.ctj.org/corpfed04an.pdf24 SEC annual reports, 2001-2010 for each bank.


12/25

11

additional $18 billion in federal tax revenue since 2001, or $38.9 billion if

Citigroups three years of deep losses are excluded.

! The average state corporate tax rate, weighted by Gross State Product, is 6.5%.25If these six banks had paid 6.5% of their US earnings in state taxes, it

would have generated an additional $4.8 billion in tax revenue for state

governments, or $10 billion if Citigroups three years of deep losses areexcluded.

Table 4: Big Bank Earnings and State Taxes, 2001-2010

Company

Pre-tax

Earnings

Pre-tax US

Earnings

Current State

Taxes

State Taxes as

% of US

Earnings

Bank of America 144.7 118.1 5.2 4.4%

Wells Fargo 110.9 110.9 2.5 2.3%

Citigroup* 160.1 87.5 3.4 3.9%

JP Morgan Chase 119.5 73.2 5.1 6.9%

Goldman Sachs 93.6 55.9 2.5 4.5%

Morgan Stanley 50.7 20.6 1.6 7.6%

TOTAL $679 billion $466 billion $20.3 billion 4.4%

* This figure excludes three years (2007-2009) of deep losses and associated taxes

Worldwide Tax Rate

It is also possible to calculate a worldwide tax rate based on figures for cash paid for

income taxes disclosed in the Consolidated Statement of Cash Flows in the banks

annual reports. 26 These figures allow us to determine combined local, state, federal, and

foreign taxes as a percentage of income, a rough approximation of worldwide tax rate.

Table 5: Big Bank Earnings and Worldwide Income Taxes, 2001-2010

Company

Cash Paid for

Income Taxes Earnings

Cash Paid as % of

Earnings

Bank of America $41.8 $144.7 28.9%

Wells Fargo $27.5 $110.9 24.8%

JP Morgan Chase $39.8 $119.5 33.3%

Goldman Sachs $29.9 $93.6 31.9%

Morgan Stanley $14.6 $50.7 28.8%

TOTAL $154 billion $519 billion 29.6%

Source: SEC annual reports, 2001-2010, for each bank.

Over the past ten years, Wells Fargo paid the lowest worldwide tax rate of thegroup, at 24.8% $27.5 billion in cash paid for taxes on $110.9 billion in pre-tax

25 A 2005 analysis by Citizens for Tax Justice found the average state tax rate (weighted by GSP) to

be 6.8%. http://www.ctj.org/pdf/corp0205an.pdf26 http://www.nytimes.com/2011/02/02/business/economy/02leonhardt.html


13/25

12

earnings.

Five banks (excluding Citigroup and its deep losses) paid 29.6% of theirincome in taxes from 2001 to 2010. JPMorgan Chase paid the highest rate, at

33.3%, but this figure is still below the federal corporate income tax rate and this

represents federal, state, and foreign income tax payments combined.

Broader Financial Industry

Tax avoidance in the financial industry is not limited to the six big banks. A detailed

analysis by Citizens for Tax Justice in 2004 looked at earnings and taxes at 275 Fortune

500 companies, including forty financial companies, from 2001-2003, and found high rates

of avoidance:27

Forty top financial firms paid $56 billion in federal taxes out of $285.6billion in US earnings, resulting in an effective tax rate of 19.7%. Twenty-one

of them paid less than half the statutory 35% federal rate over this period, and

four received net tax refunds.

The forty financial firms collectively paid $43.6 billion less than thestatutory rate in just three years.

CTJ found Citigroup, JP Morgan Chase, Bank of America, and Wells Fargoto be among the top 25 beneficiaries of tax breaks, receiving a total of $13

billon in tax breaks in 2001-2003.

Tax Shifting and Foreign Subsidiaries

Big banks use a variety of mechanisms to minimize their federal and state corporate

income tax obligations. Many of these mechanisms take advantage of a network of foreign

subsidiaries in countries with low tax rates and inconsistent tax accounting laws.

Decades of studies by economists, regulators, and watchdogs have shown that US

corporations employ a broad arsenal of global tax avoidance techniques to escape US

taxes. Common methods include shifting debt to subsidiaries in high-tax countries to

lower their overall tax burden without otherwise affecting their operations, and selling

assets from one subsidiary to another at artificially high or low prices in order to shift

reported income to low-tax countries, known as transfer pricing.28

It is notoriously difficult to track the use and cost of such techniques, but the proliferation

of foreign subsidiaries in low-tax countries is an easily identifiable symptom, one used

extensively by the six biggest banks.

27 http://www.ctj.org/corpfed04an.pdf28 http://assets.opencrs.com/rpts/R40623_20100903.pdf


14/25

13

! The six big banks collectively operate 928 subsidiaries incorporated injurisdictions identified as offshore tax havens by the Government

Accountability Office (GAO).29

! Bank of America operates 371 subsidiaries incorporated in offshore taxhavens, more than any other big bank. 204 of these subsidiaries areincorporated in the Cayman Islands, which has a corporate tax rate of 0%.

Table 6: Big Bank Subsidiaries in Foreign Countries and Tax Havens

Company

Total

Subsidiaries

Foreign

Subsidiaries

Tax Haven

Subsidiaries

% Foreign

Subsidiaries in

Tax Havens

Bank of America 2027 761 371 48.8%

Wells Fargo 1676 146 66 45.2%

Citigroup 174 108 25 23.1%

JPMorgan Chase 547 217 83 38.2%

Goldman Sachs 104 52 39 75.0%

Morgan Stanley 1209 587 344 58.6%

TOTAL 5737 1871 928 49.6%

Source: Exhibit 21 to 2010 annual reports for each bank, filed with the SEC.

! Citigroup claimed 113 Cayman Islands subsidiaries in its 2008 annual report; in its2009 and 2010 annual reports, it claimed one such subsidiary. It is not clear

whether Citigroup has actually shuttered 112 Cayman Island subsidiaries or altered

its disclosure patterns.

See the Appendix for a full table of banks and their tax-sheltered subsidiaries.

A recent GAO analysis found that US corporations have in recent decades increased the

share of their reported earnings coming from foreign countries for the purposes of tax

avoidance.30 Our survey suggests that the biggest banks have employed this strategy over

the past ten years.31

! During the last decade, the six banks reported around $238 billion inforeign earnings out of $620 billion in total earnings, or 38.4%. Excluding

Wells Fargo, which reports no foreign earnings, the proportion is 46.7%.

29 The list of offshore tax haven jurisdictions is drawn from the GAOs December 2008 report,

International Taxation: Large U.S. Corporations and Federal Contractors with Subsidiaries in

Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions, pp. 12-13.

http://www.gao.gov/new.items/d09157.pdf30 GAO, Multinational Corporations: Effective Tax Rates Are Correlated with Where Income Is

Reported, August 2008, available at http://www.gao.gov/new.items/d08950.pdf31 Current foreign income taxes are reported in notes the banks financial statements detailing

components of income tax expense.


15/25

14

! The share of the banks total earnings reported as foreign earnings hasrisen in recent years. 23.8% of total earnings were foreign earnings during 2001-

2005, compared to 55.7% during 2006-2010.

! During the last decade, about 36.1% of the six banks total taxes have goneto foreign governments, and 40.1% excluding Wells Fargo, which reports no

foreign earnings.

! The share of banks total taxes going to foreign governments has also risenin recent years. 25.6% of total taxes were paid to foreign governments from

2001-2005, compared to 50.7% over 2006-2010.

! In recent years, the six banks have paid billions more in foreign taxes thandomestic taxes. Over the last three years, the six banks reported paying $27.2

billion in foreign taxes, compared to $15 billion in combined federal and state

taxes. In 2010, the six banks paid $8.7 billion in foreign taxes, $2.2 billion more

than they paid to the US government last year.

In general, US companies pay 35% in taxes on income from foreign subsidiaries when they

bring it back to the US, but are credited for foreign taxes already paid on that income. By

keeping the earnings offshore, they can defer US tax payments indefinitely.

As the big banks have shifted a larger share of total earnings to foreign countries, they

have kept a growing pool of foreign earnings reinvested abroad, exempt from US taxation.

! The six banks currently report a combined $93.7 billion in undistributedforeign income, about one-tenth of the estimated undistributed income for

the entire S&P 50032

and more than a third of their total foreign incomereported since 2001.

! Due to credits on foreign taxes already paid on these earnings, the sixbanks estimate they would pay only $18.7 billion, or about 20%, in taxes if

all their undistributed income were repatriated, compared to the statutory

rate of 35%. These figures suggests that the six banks may have only paid 15% in

taxes so far to foreign governments on these accumulated foreign earnings.

32 http://www.bloomberg.com/news/2010-12-29/dodging-repatriation-tax-lets-u-s-companies-

bring-home-cash.html


16/25

15

Table 7: Undistributed Foreign Earnings of Big Banks

Company

Undistributed Foreign

Earnings

Estimated Fed.

Taxes if

Repatriated

Estimated

Tax Rate

Bank of America $17.9 $2.6 14.5%

JP Morgan Chase $19.3 $4.3 22.3%

Citigroup $32.1 $8.6 26.8%Wells Fargo $1.6 $0.5 31.8%

Goldman Sachs $17.7 $2.7 15.1%

Morgan Stanley $5.1 - -

TOTAL $93.7 billion $18.7 billion 19.9%

Source: 2010 annual reports for each bank, filed with the SEC.

* Morgan Stanley states that it is impracticable to estimate how much taxes would be paid upon repatriation.


17/25

16

III. Assisting Tax Dodgers

Banks facilitate tax avoidance by high net worth individuals in their private wealth

management divisions. These divisions often advertise their tax avoidance capabilities

euphemistically. For example, US Trust the large private wealth management arm of

Bank of America touts an uncompromising focus on tax efficiency on its website: 33

A key aspect of wealth structuring is maximizing tax efficiency, a U.S. Trust

strength, whether in converting low-basis assets, facilitating inheritance in a tax-

efficient manner or managing taxable portfolios.

Another Bank of America - US Trust page, on Customized Yacht Financing, touts

the benefits of registering yachts in foreign countries:

Many of our clients choose to register their yachts in a foreign jurisdiction. The

reasons are many and include tax considerations and crew hiring and estate

planning issues. Our goal is to help ensure that you have all the information you

need to make the decision that best fits your needs.34

Citigroups International Personal Bank also openly promotes offshore investments as a

way of gaining tax advantages in addition to freedom and security under the

question, Why Invest Offshore?35

Freedom, security and access to investments

Offshore investing is ideal for international clients with global financial needs. We

understand that our clients want to hold their money outside of their home

country, whether to potentially gain tax advantages or to offer them more freedomin managing their wealth. And we help you to do this in the context of highly

regulated, safe and secure markets.

The IRS lists private banking (US and offshore) in its list of entities used in abusive

offshore tax avoidance schemes.36 These schemes, the IRS notes, exploit secrecy laws of

offshore jurisdictions in an attempt to conceal assets and income subject to tax by the

United States. The IRS notes that authorities have estimated that $5 trillion in wealth is

held offshore, costing the US at least $70 billion per year.

33 http://www.ustrust.com/UST/pages/wealthstructuring.aspx34 http://www.ustrust.com/ust/pages/Customized-Yacht-Financing.aspx35 http://www.citigroup.com/ipb/europe/whoweare/whyoffshore.htm36 http://www.irs.gov/businesses/small/article/0,,id=106568,00.html


18/25

17

IV. Other Wall Street Tax Breaks And Revenue

Sources

Wall Street bankers enjoy a number of other tax breaks that keep their taxes low, starving

the public purse of revenue and shifting the tax burden onto working families. Before they

even route their money to the Cayman Islands, they reap the benefits of low tax rates andloopholes. The following is a cursory review of tax breaks that financial firms fight to

protect and sensible revenue-raising measures that Wall Street perennially opposes in order

to protect profits. Undoing these tax breaks and implementing these taxes on financial

firms would raise billions in public revenues.

Financial Speculation Tax

The financial speculation tax is a small tax on Wall Street trades such as sales and

purchases of stock. According to the Center for Economic and Policy Research, such a tax

could raise $100 billion per year in revenue.37 The US levied a financial speculation tax

from 1914 to 1966, and New York State has a financial speculation tax on the books that it

refunds back to financial firms (last year, it refunded $14.5 billion in transfer taxes). The

UKs financial markets have flourished and grown with a speculation tax in place.

In addition to raising much-needed revenue, the tax would reduce destructive, short-term

speculation by Wall Street banks. A number of economists have supported versions of the

tax, including Larry Summers and Joseph Stiglitz, and the financial speculation tax was

named an idea of the year by the New York Times in 2008. 38

Hedge Fund Loophole

The carried interest tax break is an IRS provision that allows executives at private

partnerships such as hedge funds and private equity firms to treat much of their

income as capital gains, rather than as ordinary income. This means that their income is

taxed at 15%, the income tax rate for an individual making $34,000 or less.

In its recent budget, the White House estimates that removing the loophole would raise

$10.1 billion over the next five years and nearly $15 billion over the next ten years.39

Bush Tax Cut Extensions

37 See CEPRs Facts and Myths about Financial Speculation Tax at its website:

http://www.cepr.net/documents/fst-facts-myths-12-10.pdf38 http://www.nytimes.com/2008/12/14/magazine/14Ideas-section4-t-

005.html?_r=1&scp=1&sq=dean%20baker%20stock%20transfer%20tax&st=cse39 http://blogs.wsj.com/privateequity/2011/02/14/once-more-unto-the-carried-interest-

tax-breach/


19/25

18

Because of their extraordinarily high incomes, bankers are some of the top beneficiaries of

the Bush tax cuts and the two-year extension of the cuts passed in late 2010. The extension

of the cuts means that the highest tax rate will continue to be 35%, rather than revert to

39.6%.

The New York Timesreported in December that Wall Street banks like Goldman Sachs

were nervously eyeing the calendar as Congress debated the tax cuts they wereconsidering whether to pay year-end bonuses before the new year in order to avoid the tax

increase. The Timesestimated that letting the Bush tax cuts lapse would cost a banker

earning a $1 million bonus $40,000 to $50,000.

Bank Tax

Recognizing the extraordinary burden big banks place on the public purse, the Obama

administration is attempting to levy a tax on financial firms. The tax on banks with more

than $50 billion in assets would generate $30 billion over the next ten years, according to

the Obama administration.

In June 2010, Senator Scott Brown forced the removal of a similar, $19 billion tax on

financial firms from the financial reform package making its way through Congress. 40

Contributions from the finance, insurance, and real estate (FIRE) industry a rough

approximation for Wall Street made up the largest component of Browns fundraising

take in the 2010 election cycle, according to the Center for Responsive Politics. 41

40

http://www.boston.com/news/nation/washington/articles/2010/06/30/browns_threat_gets_ban

k_tax_removed/41 http://www.opensecrets.org/politicians/industries.php?cycle=Career&cid=N00031174&type=I


20/25

19

Appendix

An Important Note on Methodology

The calculations of taxes paid in this study should be considered rough

approximations of what the financial firms discussed are actually paying.

Corporations are not required to make income tax returns public, so it is quite challenging

to determine how much they actually pay in taxes. Publicly held corporations are, however,

required to make certain tax-related disclosures in filings with the Securities and Exchange

Commission (SEC). These figures can be used to estimate income taxes paid to the federal

government, state and local governments, and foreign governments for a particular period.

This study determined federal, state, and foreign tax payments using the currentpayable tax

figures reported by publicly held corporations in the notes to their annual reports (filed

with the SEC). The study disregarded deferredtaxes, which are tax payments anticipated to

be due in the future.42 According to Citizens for Tax Justice, to get a sense of what acorporation pays each year, we should include the currentU.S. taxes paid,

but notthe deferredU.S. taxes. "Deferred" is a euphemism for "not paid."43

Rather than calculate an effective tax rate for the banks, the study presents pre-tax

earnings and pre-tax US earnings where available in order to contextualize current payable

income tax figures found in the banks annual reports. Federal and state income taxes as a

percentage of pre-tax US earnings should be considered a rough approximation of thecorporations US tax rates (US corporations are not required to pay federal income taxes

on foreign earnings unless they are repatriated to the US, so it is necessary to consider pre-

tax U.S. earningswhen estimating these rates.) These rates also help approximate the extent

to which these rates depart from the statutory federal rate of 35% through various tax

avoidance strategies. In some cases, where corporations did not report pre-tax US

earnings, it is necessary to estimate the US component of income. We made no

adjustments to reported pre-tax earnings or current payable federal taxes; as a result, our

estimates of tax rates are likely conservative.44

An international effective tax rate can also be calculated using cash paid for income taxes

figures in the banks Consolidated Statements of Cash Flows in their annual reports.

42From Bank of Americas 2010 10-k: There are two components of income tax expense: current

and deferred. Current income tax expense approximates taxes to be paid or refunded for thecurrent period. Deferred income tax expense results from changes in deferred tax assets and

liabilities between periods. These gross deferred tax assets and liabilities represent decreases or

increases in taxes expected to be paid in the future because of future reversals of temporary

differences in the bases of assets and liabilities as measured by tax laws and their bases as reported

in the financial statements.43 http://www.ctj.org/taxjusticedigest/archive/2011/02/us_corporations_are_paying_eve_1.php44 The notes to CTJs 2004 report include details of the range of adjustments that can be made as

part of an analysis of effective tax rates: http://www.ctj.org/corpfed04an.pdf


21/25

20

Several economists have calculated these rates recently and found low worldwide effective

tax rates, and we find similarly low rates for the banks in the study.45

The challenges encountered in the course of parsing these financial statements and

determining tax payments highlight the need for more transparent corporate tax

disclosures. In the meantime, big banks should come clean and disclose their tax returns to

save the public from labyrinthine tax sleuthing.

45 http://www.nytimes.com/2011/02/02/business/economy/02leonhardt.html


22/25

21

Table 8: Bank Subsidiaries Incorporated in Offshore Tax HavensSource: SEC 2010 10-k filings (annual reports), exhibit 21 list of subsidiaries for each bank. Accessed at SEC EDGAR.

Bank

Total

Reported

Subsidiaries

Subsidiaries in

Offshore Tax

Havens

Offshore Subsidiaries by Jurisdiction of

Incorporation

Bank ofAmerica

2027 371 Bahamas (3); Bermuda (5); Cayman Islands(204); Costa Rica (1); Gibraltar (6);

Guernsey (2); Hong Kong (3); Ireland (18);

Isle of Man (1); Jersey (20); Lebanon (1);

Luxembourg (32); Mauritius (10); Monaco

(1); Netherlands (41); Netherlands Antilles

(1); Panama (1); Singapore (12);

Switzerland (4); Virgin Islands (5)

Morgan Stanley 1209 298 Bermuda (5); Cayman Islands (169);

Cyprus (3); Gibraltar (9); Hong Kong (14);

Ireland (8); Isle of Man (1); Jersey (21);

Luxembourg (49); Malta (1); Mauritius (5);

Netherlands (1); Singapore (10);

Switzerland (2)

JPMorgan

Chase

551 166 Barbados (1); Bermuda (5); British Virgin

Islands (3); British Virgin Islands (1);

Cayman Islands (11); Hong Kong (9);

Ireland (8); Jersey (5); Luxembourg (9);

Mauritius (13); Netherlands (4); Singapore

(10); Switzerland (4)

Wells Fargo 1676 66 Aruba (1); Barbados (1); Bermuda (5);

British Virgin Islands (1); Cayman Islands

(19); Cyprus (1); Hong Kong (7); Ireland

(2); Luxembourg (4); Mauritius (11);

Netherlands (8); Singapore (4); Virgin

Islands (2)

Goldman Sachs 105 39 Bermuda (3); British Virgin Islands (2);

Cayman Islands (17); Hong Kong (2);

Ireland (4); Mauritius (9); Netherlands (2)

Citigroup 174 25 Bahamas (3); Bermuda (2); Costa Rica (3);

Hong Kong (3); Ireland (3); Mauritius (2);Netherlands (2); Singapore (3); Switzerland

(3); Cayman Islands (1)


23/25

22

Table 9: State Budget Deficits, 2009 2013

Source: Center for Budget and Policy Priorities

(all numbers in millions of dollars)

State

2009

deficit

2010

deficit

2011

deficit

Total So

Far 2012 deficit

2013

deficit

Total

Projected

US TOTAL $109,900 $190,800 $122,600 $423,300 $124,700 $70,400 $195,100Alabama 1,100 1,600 586 3,286 - - -

Alaska 360 1,300 0 1,660 - - -

Arizona 3,700 5,100 3,100 11,900 974 612 1,586

Arkansas 107 395 0 502 - - -

California 37,100 45,500 17,900 100,500 25,400 19,200 44,600

Colorado 1,100 1,600 1,500 4,200 988 - 988

Connecticut 2,700 4,700 5,100 12,500 3,700 3,600 7,300

Delaware 443 557 377 1,377 208 - 208

Florida 5,700 6,000 4,700 16,400 3,600 - 3,600

Georgia 2,400 4,500 4,200 11,100 1,700 - 1,700Hawaii 417 1,200 594 2,211 410 362 772

Idaho 452 562 84 1,098 300 - 300

Illinois 4,300 14,300 13,500 32,100 15,000 - 15,000

Indiana 1,200 1,400 1,300 3,900 270 - 270

Iowa 484 1,300 1,100 2,884 294 - 294

Kansas 186 1,800 510 2,496 492 - 492

Kentucky 722 1,200 780 2,702 780 - 780

Louisiana 341 2,500 1,000 3,841 1,700 1,600 3,300

Maine 265 849 940 2,054 436 368 804

Maryland 1,500 2,800 2,000 6,300 1,600 1,900 3,500Massachusetts 5,200 5,600 2,700 13,500 1,800 - 1,800

Michigan 2,000 3,300 2,000 7,300 1,800 - 1,800

Minnesota 1,600 3,400 4,000 9,000 3,900 2,000 5,900

Mississippi 453 917 716 2,086 634 - 634

Missouri 542 1,700 730 2,972 1,100 - 1,100

Montana 0 0 0 0 80 227 307

Nebraska 0 305 329 634 314 472 786

Nevada 1,600 1,500 1,800 4,900 1,500 1,500 3,000

New Hampshire 250 430 365 1,045 - - -

New Jersey 6,100 11,000 10,700 27,800 10,500 - 10,500

New Mexico 454 995 333 1,782 410 - 410

New York 7,400 21,000 8,500 36,900 9,000 14,600 23,600

North Carolina 3,200 5,000 5,800 14,000 3,800 - 3,800

North Dakota 0 0 0 0 - - -

Ohio 2,600 3,600 3,000 9,200 3,000 - 3,000

Oklahoma 114 1,600 725 2,439 600 - 600

Oregon 442 4,200 1,800 6,442 1,800 - 1,800


24/25

23

State

2009

deficit

2010

deficit

2011

deficit

Total So

Far 2012 deficit

2013

deficit

Total

Projected

Pennsylvania 3,200 5,900 4,100 13,200 4,500 2,500 7,000

Rhode Island 872 990 395 2,257 290 328 618

South Carolina 1,100 1,200 1,300 3,600 877 1,200 2,077

South Dakota 27 48 102 177 127 - 127

Tennessee 1,500 1,200 1,000 3,700 - - -

Texas 0 3,500 4,600 8,100 13,400 13,400 26,800

Utah 620 1,000 700 2,320 437 - 437

Vermont 141 306 338 785 150 126 276

Virginia 2,300 3,600 1,300 7,200 2,300 - 2,300

Washington 1,300 4,800 3,500 9,600 2,900 2,900 5,800

West Virginia 0 304 134 438 155 - 155

Wisconsin 1,700 3,200 3,400 8,300 1,800 1,700 3,500

Wyoming 119 32 147 298 - - -

Washington

D.C. 679 817 104 1,600 - - -


25/25

Data Index

Much of the data analyzed in this report was drawn from annual reports filed by each

bank. Annual reports for each of the banks can be found the following pages:

Bank of America:

http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000070858&type=10-k

Citigroup:


Goldman Sachs:


JPMorgan Chase:


Morgan Stanley:


Wells Fargo:


Information on income taxes, and amounts currently payable for federal, state and local, and

foreign income taxes, can be found in the notes to each banks financial statements. Cash paid for

income taxes in any given year is an item in the Consolidated Statements of Cash Flows for

each bank. Pre-tax earnings can be found in the Consolidated Statements of Income/Earnings.Pre-tax US earnings are sometimes provided, and in other cases need to be deduced from

statements of foreign earnings.

big bank tax drain

Documents